German stock exchanges

Swabian gadfly

A small exchange irritates a big one

DEUTSCHE BÖRSE, a Frankfurt-based stock exchange with global ambitions, is trying to swat a gadfly in its own backyard. It may succeed only by raising some of the same governance issues that threaten the future of the New York Stock Exchange (see article).

Five other stock exchanges still operate in Germany, but only one of them, in nearby Stuttgart, does a good enough job to irritate the Frankfurters. The Stuttgart exchange has over 80% of the retail market for warrants, or securitised derivatives, a huge and growing business among private investors. For the outlay of a few euros, German punters can bet on the 35,000-odd warrants listed on everything from currencies to gold.

The issuers of these securities are big banks, such as Citibank or Deutsche Bank. But they all use Stuttgart because, since 1999, a single broker there, Euwax, has nurtured a business with no serious rival. Last year it made €21.7m ($27.2m) in pre-tax profits.

In September, Deutsche Börse tried, half-heartedly, to regain some lost ground. It launched Smart Trading, a direct imitation of Euwax, with the support of some big intermediaries. So far, the punters have stuck with Stuttgart.

Hence the Frankfurters are turning up the heat. They are quietly suggesting that a market run by a single specialist broker, which since February 2003 has had the same majority owner as the Stuttgart exchange, does not smell quite right. With only one broker, for example, how can the exchange ensure that customers really do get the best price? Stuttgart retorts that if clients were not getting a good deal, they would go elsewhere. As long as Germany's stock exchanges are supervised by their regional governments rather than the federal watchdog, BaFin, tougher questioning on such issues is unlikely to come from above, absent a state prosecutor as energetic as New York's Eliot Spitzer.

Frankfurt can probably only win by showing that it can beat Stuttgart on price and service. Frankfurt's five specialist firms are already committed to making prices finer than Stuttgart's. There is another option: Deutsche Börse could make Stuttgart an offer it can't refuse, and buy Euwax outright. Given the implacable rivalry between German states, Stuttgart will be part of Germany's financial scene for a while yet.